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HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: reset bonds: mirror bond scheme

S454 has now been repealed by F(No.2)A15 for schemes effected on or after 18 November 2015. It is succeed by the {regime anti-avoidance rule CFM38600}.

Mirror bond scheme

This type of scheme aims to convert income (in the form of accruing discount) on a bond into capital. It uses two sets of reset bonds with equal and opposite (mirror) triggers to create a bond with a commercial value less than its cost. If a company buys the company owning the bond rather than the bond itself, the increase in value towards redemption will be reflected by an increase in the value of the shares, giving rise to a capital profit.


The scheme sponsor arranges for a borrower to issue a pair of reset bonds at par £100,000, each initially bearing a commercial rate of interest. Each bond is owned by a separate, newly formed tax haven company. Following the trigger event, the interest rate on one bond doubles while dropping to zero on the other. The high interest bond increases in value to, say, £120,000 while the other bond falls in value to £80,000. The issuer’s overall position is unaffected, as the higher rate of interest on one bond is compensated for by the zero rate on the other.

The investor wishes to acquire the bond worth £80,000 and convert the income profit of £20,000 on maturity into capital. If it bought the bond directly, it would have to accrue the market discount of £20,000 over the life of the bond. Instead, it buys shares in the tax haven company (A Ltd) which acquired the bond at issue. As the bond is A Ltd’s only asset, the shares cost £80,000, reflecting its current value. Over time, A Ltd’s shares will increase in value to £100,000, as the bond matures. This discount accrues to the parent company as a capital profit on shares, which it would only ever realise if it sold them. In fact, it may obtain the cash proceeds on maturity by paying them up as dividend, leaving A Ltd as just a shell.

Though registered in a tax haven, A Ltd is tax-resident in the UK. Because it accounts for the loan relationship on an accruals basis, its accounts will not reflect any changes in the bond’s value, which it will have shown at cost £100,000 throughout. When it redeems the bond for £100,000, A Ltd will show no profit or loss.